bankruptcy issues for landlords - hesler & associates
TRANSCRIPT
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Bankruptcy Issues forLandlords
Realty Financial Partners PresentationSeptember 8, 2009
Neal Hesler, Principal I—I |H W |~iHesler & Associates LLC 1 .1 JLj^JA-JLj•[--•-• ;̂-̂
& A S S O C I A T E S , L L C
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The Bankruptcy End Game
The Tenant has only two alternatives- Assume the Lease- Reject the Lease
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& A S S O C I A T E S , LLC
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The First 60 Days ... the Trade-Off
Assume- Cure all Defaults- Commit to the Lease
for the Future- Provide assurances of
future performance
Reject- Surrender premises- Terminate Lease
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& A S S O C 1 A T E S , L L C
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Getting From Here to There
Until the Tenant makes the big decision, itmust live up to the lease obligations...i.e. Paythe RentThis rule applies only to post-bankruptcyobligations
First 60 day issues
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The First 60 Days ... the Trade-Off
Until Day 59- May suspend rent /
performance- Deadline to make the
ultimate decision isDay 60
On day 60- Must become current
(post-bankruptcy) andstay current
- Deadline to makedecision extendedindefinitely
.E& A S S O C I A T E S , L LC
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Relief During the 60 Days
If rent is material, a Motion can be made torequire immediate payment during the 60daysIf tenant is not using the premises, it will havean incentive to reject early
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& A S S O C S A T E S , L L C
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Bankruptcy Is Not Scary
High prospect of recovering contract rent untillease is rejectedAbility to regain premises quickly, withoutprotracted unlawful detainer proceedings
;iA S S O C i A T E S , LL C
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If the Lease Is Rejected
Obtain possession / clear the premisesAssert claims for damagesPost-Bankruptcy Claims ("AdministrativeClaims")Rejection Damages
E& ASSOCSATES, L I C
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Bankruptcy Food Chain
Chapter 7 Trustee & His'
AdministrativeExpenses"
Bankruptcy FoodChain
PoSt-Cnapter7R*nt
Chapter 11 Debtor inPossession & Attorneys
Chapter 11Administrative Expenses
_ .Post Bankruptcy Rent
Pre-Bankruptcy PriorityClaims
$4,300 of WagesMost taxes
Pre-Bankruptcy GeneraiUnsecured Claims
Landlord's RejectionDamages
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S S O C I A T E S , L LC
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Administrative Rent
Chapter 7 Trustee will surrender possessionfor waiver of Chapter 7 ClaimChapter 11 Debtor must pay rent to hold ontothe lease
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& A S SOC I ATE S, L LC
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Rejected Lease - CollectingAdministrative Rent
File MotionFile Request for Payment
File Proof of Claim
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Limitations on Rent Claims
"Actual" DamagesSection 502(b)(7) Cap:
Rent due when bankruptcy began, plusOne year's (fully loaded) rent
A S S O C 1 A T E S , L L C
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Proof of Claim
• Must file Proof of Claim• Do it soon (within 30 days of rejection)
• File in estimated amount, offer to amend later• Amount = One Year's Fully Loaded Rent
& A S S O C I A T E S , L L C
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Collection Sources
Security DepositsGuaranteesLetters of CreditPP&E
Proof of Claim in Bankruptcy
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Security Deposits
Security Deposit is the Tenant's PropertySubject to Bankruptcy Limitation on Claims(one year's rent)
Technically subject to automatic stay
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Letter of Credit
Probably treated as a third party sourceProbably can apply Letter of Credit in excessof bankruptcy maximumProbably collection from Letter of Credit doesnot reduce Proof of Claim (but note "actualdamages" limitation)
EA S S O C I A T E S , L L
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When Do You Call a Letter of Credit?
• After rejection of the lease, if at all possible• Bankruptcy Automatic Stay does not apply,
but- Contractual limitations- Issues re: excess funds
E& A S S O C I A T E S , L L C
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What Should a Property Manager Do?
Evaluate Tenant's ability to live without theleaseDetermine Tenant's willingness to pay currentrent
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Locking Down the Outcome
If the Tenant wants to leave, negotiate for:- Date certain for surrender- Disposition of PP&E- Marketing access
& A S S O C I A T E S , I L C
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Leasing Issues
Tenant can always sell a below market leaseTenant can always reject an above marketleaseBe wary if you need more than one year'srent as a credit enhancement
& A S S O C I A T E S , L L C
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Conclusion
Closing RemarksQ & A
ESLES S O C 1 A T E S , L L C